The RBI on Thursday said that a pick-up in inflation rate was purely driven by supply shocks and sector-specific, demand-supply mismatches caused by the Coronavirus pandemic. 

In its monthly bulletin for July, the central bank noted that these factors should ease over the year as supply-side measures took effect. The RBI further added that the tapering of the second Coronavirus wave, coupled with an aggressive vaccination push, had brightened near-term prospects for the Indian economy. 

However, the central bank warned that a strong increase in aggregate demand was yet to take shape even though several high-frequency indicators of activity were recovering. 

Citing the data collected from banks, the RBI said that the transmission of policy Repo Rate changes had improved substantially over the last two years. The share of outstanding loans linked to external benchmark in total floating-rate loans had increased from as low as 2.4 per cent during September 2019 to 28.5 per cent by the end of 2020-21. 

“The adoption of external benchmark-based pricing of loans has strengthened market impulses for a quicker adjustment in deposit rates. Further, a combination of surplus liquidity conditions amidst weak credit demand conditions has enabled banks to lower their deposit rates. The lowering of deposit rates has resulted in the decline in cost of funds for SCBs (scheduled commercial banks), prompting them to reduce their MCLRs (Marginal Cost of Funds-based Lending Rates) and, in turn, their lending rates,” the monthly bulletin revealed.